Markets expect a deal...They better get one — Thursday is a soft deadline — Market is mostly happy overnight

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MARKETS EXPECT A DEAL … THEY BETTER GET ONE — POLITICO’s Ben White and MJ Lee: “Wall Street has so far mostly shrugged off the latest Washington political crisis, assuming an eleventh hour deal will materialize to raise the debt limit and stave off a potentially ruinous default. But if the final act, which starts Wednesday, does not quickly produce the expected ending, the market’s vengeance could be swift and severe. ‘This thing is going to get resolved by Thursday,’ said Chad Morganlander, portfolio manager at Stifel Nicolaus & Co., echoing the brashly confident view heard up and down Wall Street the last couple of weeks.

“But Morganlander quickly added a follow up that is also part of the standard banker response. If a deal is not in the works by Thursday, he said, ‘things will get increasingly jittery, global markets will start to destabilize.’ That’s the consensus market view. A deal better be on its way to completion by Thursday — the date flagged by Treasury for when it will run out of the ability to borrow — or else stocks will tank, interest rates will spike and markets will presumably force quick action in Washington, as they did with the Wall Street bailout in 2008.

THURSDAY IS A SOFT DEADLINE – “A default won’t occur at the stroke of midnight Thursday — given the timing of when payments to creditors are due and how much cash will still be on hand, there is some time before the Treasury is short of funds. But that will be of little comfort if there is no deal in sight at that time.

‘Is Thursday a hard and fast date? No, but the Oct. 17th threshold is psychologically important if there’s no debt ceiling resolution,’ said Joseph Quinlan, chief market strategist at U.S. Trust. Should no deal be on the horizon, Quinlan said, the nation would ‘cross into some very unchartered waters. It will feed on itself, there’s going to be a cascading effect of more worry, less spending, less lending, rising costs, weaker dollar.”

MARKETS MOSTLY HAPPY OVERNIGHT — “As of early Wednesday morning, investors remained hopeful of a happy ending, extending an exuberant run that has kept stocks mostly rising and interest rates largely steady throughout the crisis, confounding some in Washington who privately hungered for a big collapse on Wall Street to force political action. Asian markets, U.S. stock futures and the dollar [initially] rose overnight on reports that Senate leaders had resurrected previously-paused deal talks and would likely send a bill to the House to raise the debt limit through February 7th. …

“Stocks sank earlier Tuesday after the Senate deal initially appeared to die. And Treasury once again had trouble auctioning short-term debt. But as with many debt-ceiling related moves, the action Tuesday reflected dissatisfaction with the pace of deal-making rather than any serious concern about impending default” http://politi.co/1bxxhar

SENATE WORKS ON DEAL –POLITICO’s Manu Raju and Burgess Everett: “Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell are finalizing a deal to avert a debt default and reopen the government … The deal is essentially done, sources say, as aides for the two leaders finished drafting the legislative language Tuesday night. The Senate adjourned at about 10 p.m. with no official word on a deal and will reconvene at noon Wednesday. Reid and McConnell are expected to brief their respective caucuses Wednesday … Cooperation will be needed from members of both parties in order to avoid default as well as to end the first government shutdown in 17 years. And a Senate plan will need to clear the House, which has struggled to pass any bill to raise the national debt limit. …

“Under the plan, a $986 billion government funding bill would reopen federal agencies until Jan. 15, and the debt ceiling would be lifted until Feb. 7. The two parties would be given the opportunity to cut a larger-scale budget agreement to slash future deficits as a bicameral conference committee would have until Dec. 13 to finalize such a deal. …

Democrats won a major White House priority to ensure that the Treasury Department would still have the ability to use ‘extraordinary measures’ to pay its bills in case Congress does not lift the debt ceiling by Feb. 7. Republicans would win a provision ensuring that recipients of Obamacare subsidies meet the required income levels. http://bit.ly/1bVtZ4M

BOEHNER ALLIES SAY IT’S OVER — POLITICO’s Jake Sherman and John Bresnahan: “Boehner’s closest allies say they doubt he can afford another round of back-and-forth with his conference. They think this battle is over. Tuesday showed the inability of House Republicans to choose a plan, and stick to it. … By around 5:30 p.m. Tuesday, Boehner and his Republican leadership team decided enough was enough. They called off a Rules Committee meeting and decided that they would forgo a floor vote. There was even staff-level talk of a one-week debt ceiling bill to avoid default. …

“Boehner allies strongly reject the idea that the speaker could be damaged by this latest debacle. After all, it was Sen. Ted Cruz (R-Texas) who was setting the terms of this debate, not Boehner. The Ohio Republican wanted to pass a clean government-funding bill more than a month ago, while organizing a tidy negotiating process around the debt ceiling. Instead, everything became one big mess, where House Republicans were unsure what they were asking for, what they should be seeking, and for what price.” http://bit.ly/18kkTL2

GOOD WEDNESDAY MORNING — Please note that the Morning Money Breakfast scheduled for this Thursday with CFPB Director Richard Cordray has been rescheduled due to the ongoing debt ceiling crisis. The event will now take place in DC on Nov. 7th. Please update your calendars and join us then! http://bit.ly/H2LAcI

** A Message from the Campaign to Fix the Debt: Washington seems more preoccupied with partisan posturing than with our unsustainable debt. We must stop the madness, start bipartisan discussions, and solve our debt problems. It’s time to Fix the Debt. (http://www.fixthedebt.org/)

NEW THIS AM: CONSUMERS TO TRIM HOLIDAY SPENDING — Per National Retail Federation release out at midnight: “Faced with continued economic uncertainty and used to doing more with less, consumers will take a conservative approach to spending this holiday season. According to NRF’s holiday consumer spending survey conducted by Prosper Insights & Analytics, the average holiday shopper will spend $737.95 on gifts, décor, greeting cards and more, two percent less than the $752.24 they actually spent last year. … NRF is forecasting holiday sales will increase 3.9 percent to $602.1 billion. http://politico.pro/1cU8IIj

FISCAL FLY AROUND –

FITCH PUTS U.S. ON RATINGS WATCH NEGATIVE — Per release: “Fitch Ratings has placed the United States of America’s (U.S.) ‘AAA’ Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN). … The U.S. authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures. … Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”

ALL ABOUT POLITICS – Cumberland Advisors’ David Kotok on the Fitch move: “The United States has the absolute monetary and economic capacity to pay its debt. This action by Fitch is not about ability to pay. It is about governance and our willingness to pay. In that category the United States has reached the brink of political failure. … We are the world’s dominant reserve currency. The entire planet holds our debt. We are the world’s largest debtor. We have the biggest economy and the deepest financial market.

Default is the unthinkable event and the risk is now perceived to be above zero.”

OUR CO-DEPENDENT ECONOMY — Pimco’s Mohamed El-Erian in the FT: “[W]estern central banks will have no choice but to continue to carry an enormous policy burden, and do so with inevitably-imperfect measures. In addition to compensating for the inactions of other policymaking entities — particularly in the fiscal and structural reform areas — look for central bankers to continue to counter the negative impact of political dysfunction on growth. … In normal (healthier) times, markets look to central banks to provide the appropriate regulatory and monetary policy environment; and central banks look to markets to deliver efficient pricing and resource allocation.

“Today, this co-dependence has become a lot less healthy. Markets are now conditioned to expect a solid and continuous ‘central bank put’; and the revealed-preference of central banks for repeated interventions to support asset prices undermines efficient market functioning and discipline” http://on.ft.com/19NPC3H

GOP “LOST THIS BATTLE” — NYT’s Jonathan Weisman: “With so little time left, chances rose that a resolution would not be approved by Congress and sent to President Obama before Thursday, when the government is left with only its cash on hand to pay the nation’s bills. ‘It’s very, very serious,’ warned Senator John McCain, Republican of Arizona. ‘Republicans have to understand we have lost this battle, as I predicted weeks ago, that we would not be able to win because we were demanding something that was not achievable.’” http://nyti.ms/1aotTvY

U.S. PRESTIGE REDUCED — WSJ’s Thomas Catan: “As the world's pre-eminent economic power, the U.S. has been the cornerstone of the global financial system since World War II. Now, observers say that prestige may have been badly dented by Washington's latest display of fiscal dysfunction … A loss of confidence could have broad repercussions. U.S. government debt has traditionally been viewed as a risk-free asset that underlies much of the world's financial system.

“Doubt about the country's financial soundness could ripple around the globe, calling into question the value of collateral in many loans and even the dollar's status as a reserve currency. That status gives the U.S. huge advantages, including the ability to borrow at rates lower than almost any other country” http://on.wsj.com/19QLm5e

ALSO FOR YOUR RADAR –

TWITTER LOSS WIDENS — WSJ’s Rolfe Winkler, Jacob Bunge and Yoree Koh: “Twitter Inc. revealed fresh financial details in a securities filing, including continued user growth but a wider loss in the third quarter, as costs continued to outpace revenue.

The San Francisco social network also Tuesday said it plans to list its shares on the New York Stock Exchange … a strong endorsement of the Big Board's effort to be a trading hub for technology companies. … For the third quarter, Twitter said its net loss widened to $64.6 million, from $21.6 million, in the same period a year earlier. The company booked big increases in expenses for research and development, and sales and marketing. …

“Quarterly revenue more than doubled, to $168.6 million, from $82.3 million a year ago. That was roughly the same growth rate as in the second quarter. Helping to drive revenue was advertising on mobile devices, as users increasingly access Twitter on their smartphones. The company said more than 70% of advertising revenue came from mobile devices in the third quarter, compared with more than 65% in the second quarter.

To put Twitter's ad business in perspective: Users clicked on or retweeted 15 times as many ads in the third quarter as in the first quarter of 2012. Meanwhile, the average price of each ad is down over 75%.” http://on.wsj.com/1hVolNv

JPM EXPECTED TO ADMIT WRONG-DOING — NYT’s Ben Protess and Jessica Silver-Greenberg: “For JPMorgan Chase, fines totaling billions of dollars are no longer sufficient to placate the government. Now the bank’s regulators want something stiffer: a mea culpa. A month after JPMorgan acknowledged that “severe breakdowns” had allowed a group of traders in London to run up $6 billion in losses, the bank has preliminarily reached a rare agreement to admit that the trading blowup itself represented reckless behavior … The bank could settle with the Commodity Futures Trading Commission as soon as this week …

“Aside from admitting some wrongdoing, the bank is expected to pay about $100 million to resolve the case, a trading debacle last year that has come to be known as the London Whale episode. Unlike a settlement last month with the [SEC] … which largely took aim at porous controls and governance practices at the bank, the pact with the Commodity Futures Trading Commission zeros in on the bank’s actual trading practices.” http://nyti.ms/1epTngx

THIS MORNING ON POLITICO PRO FINANCE: Jon Prior and MJ Lee on the Fed and its easy money policies [http://politico.pro/1bvDsvs] … To learn more about Pro's subscriber-only coverage -- and to get Morning Money every day before 6 a.m. -- please contact Pro Services at (703) 341-4600 or info@politicopro.com.

** A Message from the Campaign to Fix the Debt: Washington seems more preoccupied with partisan posturing than in passing a budget, protecting America's full faith and credit, and dealing with the nation’s significant fiscal challenges. Fights over the short-term continuing resolution and debt limit increase are diverting attention away from the critical issues of entitlement reform, tax reform, and the nation’s unsustainable debt. At nearly $12 trillion, or 72 percent of the economy, the debt is at near record levels, and is on a course to grow dramatically over time. This is simply unacceptable. We need to stop the madness, start bipartisan discussions, and solve our debt problems once and for all. We need to find common ground through common sense. It’s time to talk. It’s time to act. It’s time to Fix the Debt. (http://www.fixthedebt.org/)